Brazil has never lacked for economic rules. It has had inflation targets, debt ceilings of various kinds, primary surplus goals, spending caps and golden rules written into law and constitution. What it has lacked is a stable political consensus about which rule actually matters when growth slows and elections approach. The latest attempt is the new fiscal framework — Brasília’s effort to replace the rigid spending cap of the post-2016 era with something more flexible, more socially expansive and, its architects insist, still credible to markets. Whether that framework holds will decide more than a few basis points on Brazilian bonds. It will determine how much room Lula’s government has to pursue its promised social agenda without triggering a familiar cycle of panic, austerity and disappointment.

What Is a Fiscal Anchor, Really?

In technocratic language, a fiscal anchor is the rule or target that anchors expectations about the path of public debt. It does not have to be a strict limit; it can be a combination of ceilings, floors and promises about future adjustment. What matters is that investors, rating agencies and domestic actors believe that when push comes to shove, the government will behave in ways consistent with that rule. In practice, the anchor is less a single number than a political contract: a shared understanding between Brasília and its creditors about how much deficit is tolerable, how fast debt can rise, and when the state will stop spending more and start tightening.

Brazil’s fiscal history is dotted with broken anchors. Periods of consolidation gave way to electoral cycles in which spending surged, revenues faltered and creative accounting proliferated. Each time, the correction came in the form of abrupt interest-rate hikes, emergency tax measures and cuts that fell heaviest on investment and social programmes. The new framework is supposed to end this pattern by making the anchor more realistic and therefore more durable. The question is whether it does so, or whether it simply pushes the next breach a few years down the line.

From Spending Cap to “Responsible Expansion”

The previous regime — centred on a constitutional spending cap that froze real federal expenditure — was born out of crisis. It answered market fears after a deep recession and political turmoil by promising that spending would grow no faster than inflation, regardless of revenue. For some, it offered a clear anchor. For others, it built rigidity into a country with urgent social and investment needs. As mandatory outlays for pensions and wages grew, discretionary spending was squeezed, leaving little space for infrastructure, education expansion or new social programmes. When the pandemic hit, the cap was suspended by emergency rules. Politically, it never recovered its aura.

Lula’s return to the presidency came with a promise to protect the poor and revive investment. The spending cap was incompatible with that objective. The new framework, in broad terms, ties spending growth to revenue growth, with floors and ceilings for how much expenditure can rise each year and targets for the primary balance over time. In theory, the formula allows for countercyclical policy: when revenues grow faster, spending can increase more; when they slow, expenditure must adjust. The promise to markets is that debt will stabilise as primary deficits shrink and, eventually, surpluses emerge. The promise to voters is that the state will not be permanently bound to austerity.

Three Regimes, Three Stories

To understand Brazil’s current experiment, it helps to place it alongside the frameworks that came before. Each one tried to answer the same question — how to make Brazilian fiscal policy believable — with different degrees of ambition and rigidity.

On paper, the latest framework reads like a synthesis: enough structure to reassure markets, enough flexibility to avoid the social and political backlash that toppled the previous model. The risk is that in trying to accommodate everyone, it ends up pleasing no one for long.

Lula’s Dilemma: Coalition Politics Meets Debt Arithmetic

Lula governs with a broad, often unwieldy coalition. To maintain it, he must deliver spending not only on flagship poverty programmes, but also on pensions, public sector wages, regional projects, tax concessions and sectoral incentives demanded by different factions. Many of these commitments are effectively mandatory — locked in by legislation, constitutional clauses or judicial decisions. The share of the budget that can be freely adjusted year by year is smaller than the headline numbers suggest.

Debt markets see the world differently. They look at the level and trajectory of public debt relative to the size of the economy, the path of the primary balance, and whether real interest rates — already high by international standards — can be justified. They listen to the central bank’s concerns about fiscal expansion undoing disinflation and watch Congress for signs that new permanent spending is being created without permanent revenue to match. Lula’s challenge is to convince both groups that they can coexist: that social spending can rise, investment can resume and debt can still stabilise.

Revenue Dreams and the Politics of “Fiscal Space”

One of the subtle shifts in Brasília’s vocabulary has been the rise of “fiscal space” as a central concept. The government argues that with better tax enforcement, new levies on high-income segments and reforms to narrow loopholes, it can raise revenue sufficiently to fund priorities within the framework’s limits. In this view, the problem is less an absolute lack of money than the unfair distribution and leaky collection of what already exists.

Markets tend to discount revenue optimism. They have seen previous cycles in which projected gains from enforcement or new taxes fell short. What matters for them is less the ambition than the implementation and the balance between recurrent spending and one-off gains. A framework that relies heavily on uncertain future revenue to square the circle of higher expenditure and debt stability will be scrutinised every time growth wobbles or a reform stalls in Congress.

Central Bank, Rates and the Fiscal-Monetary Dance

Brazil’s central bank has, in recent years, enjoyed de facto and then formal independence. Its mandate is centred on inflation, not growth or jobs. Yet in practice, its decisions are inseparable from fiscal politics. When investors fear that deficits will swell and debt might climb without a credible cap, risk premia rise, the currency weakens and the central bank feels pressure to keep interest rates higher for longer. When fiscal policy appears under control, the bank has more room to lower rates without losing credibility.

This creates a feedback loop. A government that pushes the envelope on spending to stimulate growth may find that higher rates and risk premia eat into the very growth it hopes to achieve. Conversely, a more cautious fiscal stance can, over time, reduce the cost of servicing debt and free resources for investment. The new framework was supposed to signal enough discipline to allow a gradual easing cycle. If markets decide that the signal is being diluted — through repeated exceptions, side deals or off-budget creativity — that easing can stall.

Off-Budget Temptations: State Banks and Hidden Channels

Brazilian history offers another lesson: when on-budget space is constrained, politics often migrates to the balance sheets of state-owned banks and development institutions. Credit lines, guarantees and quasi-fiscal operations can be used to support sectors, grease political bargains or maintain investment without appearing as immediate expenditure. These tools are not inherently problematic; development banks exist to take risks that private finance will not. But if they become substitutes for transparent fiscal choices, the anchor weakens.

The new framework does not fully close these channels. It raises questions about how to treat guarantees, public banks’ lending and certain investment funds in the broader assessment of fiscal stance. Investors will look not only at the letter of the law but at the ecosystem of entities around the Treasury. A rule that seems tight on budget can be undermined if off-budget mechanisms are used to achieve the same political goals without the same scrutiny.

Courtrooms, Earmarks and the “Uncontrollable” Budget

Another structural challenge is the “judicialisation” and earmarking of spending. Brazil’s Supreme Court and other judicial bodies have, over time, interpreted constitutional rights in ways that compel certain categories of expenditure. Congress, for its part, has layered new earmarks and mandatory transfers on top of old ones. Taken together, these constraints leave a shrinking share of the budget genuinely discretionary.

When a fiscal framework meets a heavily earmarked budget, adjustment tends to fall on a narrow set of items: investment, maintenance, some discretionary programmes. This pattern is politically skewed; it hits long-term capacity more than immediate consumption. It also makes it harder to deliver the kind of quality public goods — better infrastructure, reliable services, functioning institutions — that underpin growth. The framework can mandate an aggregate path, but if the composition of spending remains locked, the quality of that adjustment will be uneven.

How Markets Have Read the Framework So Far

Initial reactions to the new rules were cautiously positive but hardly euphoric. The framework is seen as an improvement over a cap that had become untenable; it offers a plausible path to stabilisation if political discipline holds and growth does not collapse. At the same time, the margins for error are thin. Small slippages in primary balances, weaker-than-expected growth or delays in revenue measures can quickly alter debt dynamics.

In this environment, credibility is not a one-off achievement but a rolling referendum. Each new spending initiative, each tax tweak, each attempt to loosen enforcement is read through the lens of the framework. A government that repeatedly pushes for exemptions, argues publicly with its own economic team, or treats the anchor as a nuisance rather than a guiding principle will find markets shortening their patience.

Three Possible Paths for Brazil’s Fiscal Story

From here, Brazil’s fiscal anchor fight can evolve in at least three broad directions. The first is the status quo path: rules formally in place, periodically adjusted, occasionally bent, with a persistent tension between expansionary politics and cautious technocracy. Debt does not spiral, but nor does it fall decisively; risk premia remain elevated; growth is constrained by high rates and uneven investment.

The second is a partial repair path. In this scenario, enforcement improves at the margin, some earmarks are loosened, revenue measures are implemented with more realism, and off-budget temptations are contained. Debt stabilises closer to a plateau; rates can fall somewhat; the framework gains a reputation not as a miracle cure, but as a workable compromise. Social spending rises, but within clearer trade-offs.

The third path is a deeper reform that Brazil has so far avoided: a combination of serious tax simplification, rebalancing of mandatory and discretionary spending, and more explicit medium-term planning that survives electoral cycles. That would mean political fights over pensions, benefits and entitlements that no government relishes. It would also mean clearer choices about what the state can and cannot promise. In return, it could deliver a more robust, less crisis-prone anchor — one rooted not just in formulas, but in a shared understanding of limits.

The Quiet Question Behind the Numbers

At one level, the debate over Brazil’s fiscal anchor is technical. It concerns primary balances, expenditure bands, debt trajectories and growth assumptions. At another, more important level, it concerns legitimacy. Brazilians have lived through inflation, stabilisation plans, crises and multiple rewrites of the rules. They have seen anchors invoked to justify cuts that feel remote from elite privilege. They have also seen what happens when fiscal chaos feeds inflation that erodes wages and savings.

For Lula’s government, and for whoever comes next, the challenge is to rebuild trust that fiscal discipline is not a code word for permanent austerity, and that social expansion is not a euphemism for reckless promises. The new framework is a tool in that effort, not a guarantee. Whether it becomes the anchor that finally holds, or just another layer of rules on top of an unchanged political logic, will be decided not in spreadsheets but in the daily bargaining between Planalto, Congress, the courts and a society that has grown weary of cycles of boom, bust and repair.